Earnings per Share or Book Value: Superior Value Driver in Equity Valuations

In this paper, we evaluate the efficacy of two value drivers namely, earnings per share and book value for developing stock price forecasts using two performance evaluation criteria: 1) root mean squared error and 2) Thail inequality coefficient. We employ data for 13 sectors of BSE 500 from 1991 to 2010. We conduct our analysis in two phases. In phase one, we find that price to earnings is the better stand alone price multiple than price to sales in the Indian context. In the next phase, we show that the combination of value drivers does not significantly improve price forecast vis-à-vis stand alone multiples. Our findings are extremely relevant for equity analysts and portfolio managers who are continuously involved in equity evaluation and developing global asset allocation strategies.